Public-private partnership (PPP) projects in India typically allow two or more parties to come together as a consortium to bid for projects. The consortium, if selected, either incorporates a special purpose vehicle (SPV) or continues as an unincorporated joint venture to implement the project.
In cases where the consortium continues as an unincorporated joint venture, concessioning authorities have insisted on joint and several liability from all consortium members to ensure full and proper performance of contracts. However, in light of recent rulings of the Authority for Advance Rulings (AAR), concessioning authorities need to reconsider their approach.
In Alstom Transport SA v DIT, a tender was floated by the Bangalore Metro Rail Corporation (BMRC). Four companies entered into a consortium agreement to bid for the tender and, if successful, perform the obligations under the concession agreement. The companies were jointly and severally bound by the terms of the tender and were to be jointly and severally liable to the BMRC for the performance of all obligations under the concession agreement.
The AAR held that if consortium members enter into a contract with a common object to earn an income by performing common obligations, and the contract imposes joint and several liability on the members for performance of their scope of work, the consortium will be treated as an association of persons (AoP), regardless of any internal agreements dividing such liability among the consortium members. A similar view was taken by the AAR in a case involving Linde AG.
As a result, a consortium having joint and several liability may be treated as an AoP under the Income Tax Act, 1961. The implications of this can be: (a) a higher incidence of income tax on the consortium members, including taxation of offshore supplies by a foreign consortium member even if its role is restricted to such supplies, which, in the absence of an AoP being formed, may not be taxable in certain cases, and which will eventually be passed on in the form of higher financial bids and result in inefficiencies for both consortium members and concessioning authorities; (b) no carry-forward of any loss or depreciation on capital goods allowed to members after the consortium ceases to exist; (c) consortium members would not be eligible to set off losses incurred in other businesses against their share of the AoP; (d) benefits under a tax treaty may not be available and, depending on domestic tax of members, tax credit against Indian income tax may not be available since the Indian income tax is paid by the AoP and not the members; (e) challenge with respect to accountability of any costs incurred by the members individually.
There is thus a need to re-examine the model requiring joint and several liability from consortium members.
One structure that can be used by a concessioning authority would be to allow the winning consortium members to form an SPV to implement and operate the project, backed by guarantees from the consortium members. This structure ensures a single point of responsibility and liability of the SPV, to both the concessioning authority and lenders, thereby dispensing with the need for joint and several liability of the consortium members while still ensuring that the sponsors remain on the hook if the SPV fails to perform its obligations.
This model is followed in various countries for PPP projects, including the UK through its private finance initiative, and is advocated by the Planning Commission of India in its model documents.
Concessioning authorities could also consider a structure where one member acts as the lead member and takes overall responsibility for ensuring performance of the contractual obligations. Other members (e.g. financial members or specialists) could be held responsible for bespoke pieces of the contract and provide bespoke guarantees to the concessioning authority, without any requirement for joint and several liability from all the consortium members.
Under this model, the concessioning authority always has recourse to the lead member for ensuring that the contract is effectively performed.
Given the number of PPP projects and the demand for infrastructure development in India, a model structure to encourage participation by private players, both domestic and foreign, should be followed. The philosophy behind any public procurement policy should be to encourage new structures, using models that improve the quality of bids and projects and increase the efficiency of bids both for the concessioning authority and the bidders thereby resulting in an overall reduction in the cost of the underlying project.
Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. Saurabh Bhasin is a partner and Chandni Lochan is an associate. Samsuddha Majumder, a counsel at Trilegal, assisted with this article.
A-38, Kailash Colony
New Delhi – 110 048
Tel: +91 11 4163 9393
Fax +91 11 4163 9292
E-mail: [email protected]
One Indiabulls Centre,
14th floor, Tower One,
Mumbai – 400 013
Tel: +91 22 40791000
Fax: +91 22 40791098
Email: [email protected]